The Alternative Minimum Tax monster is just another case in point

by Ken Hoagland
10/11/07

The latest malfunction of the income tax system is about to take a big bite out of the middle class. The Alternative Minimum Tax is only the most recent reminder of the fact that the income tax system is badly broken and that an entirely political tax-writing process renders Congress incapable of correcting even the most obvious assaults on the well-being of American taxpayers.

The Alternative Minimum Tax (AMT) was created in 1969 to capture taxes from 155 families who were so rich and so skilled at using the many arcane provisions of the tax code that they paid little or no income taxes. But because Congress erred and failed to index the provision for inflation, as many as 23 million middle-class taxpayers have already lost eligibility this tax year for deductions for children, real estate, and state taxes, as well as other exemptions and deductions.

With as little as $75,000 a year in income, taxpayers in high cost areas of the nation like San Jose, New York City, and most other urban areas are about to learn that they are considered "wealthy" by Congress and subject to the AMT. As it now stands, these taxpayers will suffer both insult and injury, because penalties will be assessed on millions of unsuspecting citizens for under-withholding sufficient taxes under the AMT.

With precious few weeks left in the legislative year, Congress will predictably posture according to various ideologies and will almost certainly quickly reach the usual impasse that will leave millions of taxpayers vulnerable to yet another unintended consequence of the income tax system. At best, there will be a one year "patch." It is not the only such destructive consequence of our broken system for taxpayers and the nation.

The “Made in America” label is being killed off by an income tax system that “embeds” as much as 20 percent additional cost in American products, here and abroad, struggling to compete with foreign produced goods without such embedded tax costs. Trillions of American dollars have moved offshore, costing American jobs, because the income tax system has never adjusted to the new reality of open global trade.

The cost, alone, of complying with the 67,500 pages of income tax regulations is estimated at $265 billion a year. The system is so complex that even the IRS cannot consistently give the right answers to taxpayers' questions. Business decisions are now routinely based on tax consequences instead of competition, and horror stories abound of double and triple taxation of the same income and assaults on taxpayers like Katrina victims who could not build new homes in time to avoid punitive tax treatment on insurance payouts. But there is a better way.

The product of years of advanced economic and market research, the FairTax replaces direct taxation of earnings with a progressive national retail sales tax. It protects the poor and middle class through a “prebate,” removes all taxes on savings, investments, and higher education, and eliminates the tax-caused price disadvantage now suffered by American companies. It is simple and transparent, eliminates the regressive FICA tax, and broadens the taxpayer base to include illegal immigrants and the underground economy.

As importantly, the FairTax eliminates the role of politics and tax lobbyists in the national tax system, while raising every penny now collected under the income tax system. The removal of tax lobbyists, an army of well-paid tax experts with differing views of what is “fair,” and the opportunities for Congress to reward political friends and punish political opponents is, of course, the political challenge in winning enactment.

There are few more stark examples of public policy ill-serving the public than the AMT and the income tax system. No matter the class warfare rhetoric that will inevitably surround both the Alternative Minimum Tax debate and the debate over the FairTax, the outcome of this fundamental need for reform will suggest whether our Founding Fathers’ promise of a citizen controlled government is still possible in our maturing democratic republic. If not, we all will remain victims of congressional politics and our destructive tax system.

Ken Hoagland is a longtime public policy advocate serving as Communications Director of FairTax.org. Research and information on the FairTax can be found at www.FairTax.org.

 

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